Some big reports came out this week from the IMF, IPCC (climate change), McKinsey and the US military – all have a bearing on global macro. And as usual I find a bunch of other relevant articles ranging from monetary policy to inequality.
Climate Change and the Environment
Global Warming of 1.5 °C The Intergovernmental Panel on Climate Change (IPCC) just released its latest report. We have 12 years to go before we hit the critical 1.5 degree increase in global warming (see chart at top of email), which could see some extreme weather effects. The report is very very detailed and not easy to read, so it’s worth reading summaries like this one or this one on individual actions one can take.
Exporting Pollution The paper finds that firms headquartered in countries with strict environmental policies perform their polluting activities abroad in countries with relatively weaker policies. These effects are stronger for firms in high-polluting industries and with poor corporate governance characteristics.
Finance and pollution The writers finds that funding from equity markets tend to support a switch to less polluting modes of production compared to bank funding. This is because banks tend to be more conservative on technology and have shorter time-horizons for green initiatives to be validated.
Growth and Tech
Modelling the impact of AI on the world economy Excellent deep dive by McKinsey on the impact of AI on the economy. It finds that global growth could be boosted by 1.2% a year by 2030. Most the technologies have been developed, and we are now in the implementation phase. Some countries are leaders in using AI like the US and China, others have strong advantages (Korea and Sweden) while some lag (Pakistan, Zambia, see table below)
Superstar firms, market power, and corporate inequality: The role of intangible capital Blog argues that “superstar” firms like Amazon, Google and Facebook don’t actually have a higher return on invested capital once their intangible capital is correctly measured. A related issue then is to correctly account expenditures as CapEx, rather than OpEx.
Explaining weak investment growth after the Great Recession: a macro-panel analysis Finds that financial market uncertainty was a big drag on investment post-crisis, while low user cost of capital was a support. “Expected demand” became a less important factor since 2008. The study mainly focused on European countries.
Analyzing the Aftermath of a Compensation Reduction Using real world data, where a firm’s call centre cut the compensation of their workers, the paper finds that the main impact was that the high-performers left the firm (adverse selection)!
Markets and Investors
Changing Risk-Return Profiles NY Fed uses a century of equities data and finds that the volatility of bank stock prices is a good predictor of future risk and returns of overall stock indices. Sounds very promising. Suggests that bank stock vol, rather than VIX may be the best measure to use for “risk”.
The Long and Short of It: Do Public and Private Firms Invest Differently? Yes, they do, public firms invest more. The Fed uses corporate tax return data and comes up with this conclusion.
The Effect of Common Ownership on Profits: Evidence From the U.S. Banking Industry Does having the same shareholder make banks less competitive with each other? The Fed finds that the answer is no at least according to the data.
Exchange rates and prices: evidence from the 2015 Swiss franc appreciation Finds that invoice currency of exports and imports is very important to determine its impact on prices – in Switzerland’s case the price of euro-invoiced goods fell more than Swiss franc-invoiced goods. They also find that the eventual pass-through to import prices was low.
What drives UK defined benefit pension funds’ investment behaviour? The funding ratio (assets over liabilities) and the strength of the corporate sponsor are the two key factors that determine moves into either bonds or equities.
Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States Very detailed report from the US military on how sees threats around the world. The thrust is a shift away from counter-terrorism towards “great powers” (China and Russia) threat.
Trump is Rising to the China Challenge in the Worst Way Possible Makes the point that China is past the US mimicking phase of its growth and is instead leading the way in AI, especially as China has more data to play with. The author argues that rather than attack China through tariffs and such, Trump should create a more AI-friendly environment in the US and create incentives to attract global talent in this field. A related piece argues that the US military’sDARPA in the past provided the US with national tech policy, but that is no longer adequate today.
The Tyranny of the U.S. Dollar Discusses the increasing backlash against the dollar from the euro and China due in part to financial sanctions the US is imposing on other countries. But the articles ends up saying that the dollar will remain top dog as the euro-area is beset with internal issues and China is not open enough.
Religious change preceded economic change in the 20th century Looking back 100 years, the authors find that secularisation tended to lead economic development.
Shake it off: Taylor Swift’s political endorsement draws praise, backlash TayTay gets political for the first time and endorses her local Democrat candidate. Trump responds by saying he likes her music “about 25% less”.
Monetary Policy and Inflation
Forward guidance and heterogeneous beliefs This BIS study looks at whether Fed forward guidance from 2011 onwards worked or not. They find it did lead to a convergence of expectations for future rate moves, but its impact on beliefs on the economy varied. Some took it pessimistically as a sign the economy was doing poorly, while others took it optimistically as it hinted at future stimulus. The BIS ends up recommending that if forward guidance is used, some promise of potential stimulus should also be stated. Another paper, The Federal Reserve Is Not Very Constrained by the Lower Bound on Nominal Interest Rates conducts a survey and comes to a similar conclusion though more unconditionally. And this paper looks at the ECB:Whatever it takes. What’s the impact of a major nonconventional monetary policy intervention?Specifically at the impact on European bank franchises in Mexico.
Accounting for accountability at the ECB Since the Global Crisis many have questioned the legitimacy of giving policymaking power to unelected officials. The article finds that the ECB and the European Parliament have increased the intensity and focus of their exchanges since the crisis. Despite populism, the tone of exchanges has remained positive.
Challenges For Monetary Policy In Emerging Markets As Global Financial Conditions Normalize. In the latest World Economic Outlook, the IMF looks at how inflation has fared in EM over the past decade or two. The main finding is that inflation expectations rather than global factors are the major driver of inflation in EM.
Inflation and Price Measurement: A Primer Useful summary of the ways in which inflation measures are overstated with an upward bias of 0.5% to 0.8% in the US. The main reasons are that the inflation indices don’t keep up with consumers moving away from expensive products to cheaper ones and the indices fail to incorporate new products fast enough.
More Amazon Effects: Online Competition and Pricing Behaviors Online competition has raised both the frequency of price changes and the degree of uniform pricing across locations in the U.S. over the past 10 years. These changes make retail prices more sensitive to aggregate “nationwide” shocks, increasing the pass-through of both gas prices and nominal exchange rate fluctuations
In-depth look at income and wealth data Part of a series of blogs and contains some good references for the topic. The blog specifically looks at the wealth of the top 1% in the UK and finds that in recent years most the wealth increase has come from financial assets rather than housing.
Invest in public education to increase intergenerational mobility Looks at state-by-state data in the US and finds that stronger public education leads to greater intergenerational (socioeconomic) mobility.
The welfare state besides globalisation and ageing forces Finds the welfare state in the EU has spread the gains from globalisation to the broader population. The twist is that immigration is needed to fund the welfare state.
Economic Thought in Ancient Greece Interesting account of the economic thoughts of the Greek heavyweights like Socrates and Plato. The articles find they misunderstand some basic economic ideas, which resulted in an anti-capitalistic thread in their philosophy. This was in contrast to Taoism which at around the same time were more open to the idea of the emergence of market mechanisms.
William Nordhaus and why he won the Nobel Prize in economics Tyler Cowen gives a good overview of Nordhaus’ work, especially in environmental economics
Why Paul Romer won the Nobel Prize in economics Tyler gives his overview of Romer, who is celebrated for his work on ideas and endogenous growth